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Thursday, September 18, 2014

Fiamma, a beneficiary of the housing boom

Fiamma Holdings Bhd
(Sept 17, RM2.33)
Not rated with target price between RM3.20 and RM3.30: Fiamma stands to
benefit from the housing boom of the last two to three years. While its
distribution business is experiencing annual resilient growth of 4% to
13%, property development is a new growth driver.

A few strategic land parcels are now held at low costs, which means high
development margins. The company is also in a net cash position. Based
on our sum-of-parts (SOP) valuations, the stock could be valued at
RM3.20 to RM3.30.

Fiamma distributes home appliances and has a property development
division, which indirectly and directly rides on the local property
cycle respectively. Despite the housing market’s mini ups and downs, its
distribution segment has achieved 4% to 13% growth per annum previously.

It has been strong in the home appliances market with a wide
distribution network nationwide. This segment typically yields 30% to
40% gross margins.

Fiamma will see a new growth driver led by its property development
wing. The market may not be aware of this business as yet, but it
contributes approximately 25% of total turnover. While Fiamma’s existing
Centara project is expected to be completed in October or November 2014,
it has at least RM1 billion worth of projects in the pipeline, including
the RM600 million high-rise developments in Jalan Yap Kwan Seng, Kuala
Lumpur and the RM400 million Vida Residenz, Johor Baru.

By the end of 2015, the management also plans to utilise its land behind
Wisma Fiamma in Kuala Lumpur for development after an existing warehouse
there is moved to Klang.

The property development division gives gross margins of 30% to 35%.
This trend is expected to continue as Fiamma’s land bank is carried at
low book costs. The most significant contributor to revised net asset
value is the 1.4 acre (0.57ha) Jalan Yap Kwan Seng land, with a land
cost of only RM631 per sq ft. The current market price for land parcels
in the vicinity is above RM3,000 per sq ft.

Fiamma is currently in a RM54 million net cash position. We expect it to
gear up gradually to approximately 20% to 30% over the next two years in
view of its upcoming slew of high-rise projects.

Dividend payout should remain at about 30%, translating into a decent
yield of almost 4%.

Fiamma land parcels are in deep value while the distribution segment
provides stable income growth. Based on our SOP valuations, the stock
could be valued between RM3.20 and RM3.30. It is currently trading at an
undemanding 6.2 times financial year 2015 price-to-earnings ratio. — RHB
Research, Sept 17

Fiamma

This article first appeared in The Edge Financial Daily, on September
18, 2014.